The Obamacare Replacement is a Train-Wreck

Note: The bill is 123 pages and can be found here. I have not had the chance to read all of it yet so my commentary is second hand. I will try to read the whole thing and post an updated analysis then.

Are you really surprised? I am not. Between a moderate president who has vocally advocated and praised leftist healthcare plans, the tendency for the legislative branch to take a back seat to the executive and for Republicans to cower in battle it should not be a surprise. Yesterday, Paul Ryan and Congressional Republicans released a their “Obamacare-lite” plan to replace Obamacare and they have been lambasted by conservatives for their ideological and practical failures. The National Review editorial board called it “a disappointing start”. The Heritage Foundation, Club for Growth and FreedomWorks have all blasted the proposed bill. It has also been blasted by Senators Rand Paul (calling it “Obamacare lite”), Mike Lee (“a step in the wrong direction”) and Representatives Justin Amash (“repackages Obamacare”) and Thomas Massie (“stinking pile of garbage”).

Let me start with the biggest problem in this plan– maintaining the ban on discrimination based on preexisting conditions but removing the individual and employer mandate. This is a massive inconsistency. You have to have an individual and employer mandate if you want insurance to work without allowing for discrimination based on preexisting conditions. The entire purpose for the mandates was to force healthy people to get on insurance plans to offset the costs of the unhealthy people now being subsidized by insurance companies. And yes, I used “subsidized” for a reason. When insurance companies have to cover someone with cancer who did not pay for a plan before that is not insurance but a subsidy. So no, banning discrimination because of preexisting conditions is not making sure they can get insurance but that they can get a subsidy paid for by healthy people. The only other way around this problem is direct subsidies to insurance companies.

To get around this, the plan allows for a thirty percent surcharge on top of insurance premiums for failing to maintain continuous coverage. While the plan gets rid of the explicit mandate it does replace it with a de-facto mandate of sorts. To quote Ben Shapiro, this is a “back door” mandate. While this mechanism is designed to achieve the same goal as the tax levied under the current regime, call me skeptical to think that a one-time surcharge would be less effective than a yearly tax, which would likely be more. As long as you did not need insurance, you could avoid the surcharge. I would love to see the numbers behind this but I a weaker mandate will not work as well as the current one.

In another way to get around the mandate-preexisting condition contradiction, the proposed plan raises what insurance companies from charging the oldest customer three times the youngest customer to five times. While this time of policy make make us feel good inside, as Milton Friedman pointed out, intentions do not matter. This is bad policy. Older people cost far more than younger people. Just to give you an idea of the disparity, according to the Bureau of Labor Statistics, “Out-of-pocket healthcare spending increased with the age of the reference person from $943 for the under-25 age group to $5,188 for the 65–74 age group.”

In another mechanism to deal with the contradiction, the plan tries to deal with this is age-based tax credits between $2,000 and $14,000 for middle and lower class individuals and families. This serves two purposes. While the Democratic mandate has the healthy population subsidize the sick through insurance companies, the Republican plan does it directly though the government. Secondly, this will incentivise and ease the brunt of the costs for poorer families when they buy insurance. In a similar policy, this plan subsidizes high-risk insurance pools created by state governments.

Another terrible policy this bill follows is the tax credit for employer-provided insurance. Currently there is a cap on this but this plan removes it. While I am all for letting businesses keep more of their money, I do not want to do it in a way that incentives purchasing more health insurance. Health Insurance, in its current state, is the equivalent of going into a grocery store with someone else’s credit card. This is one of the biggest reasons healthcare is so expensive. Currently the federal government promotes this type of policy through the tax code– this new plan doubles down on this disaster of a policy.
This plan also fails to deal with Medicaid. The reality is that Medicaid is going bankrupt and this plan, at best, would only delay it by moving Medicaid to a “per capita” system. Not only will the current expansion be maintained through 2019 (and kept until everyone leaves the program) but they will continue to help pay for those who are added after 2019 although at a lower level. While ending the limitless stream of funds to this bankrupt program is good but this will only turn it from a limitless stream to a large stream. So much for fiscal responsibility.

Let me quote Megan McArdle of Bloomberg,”Arguably, this [age based tax credits] could help some of the problems that Obamacare has created in the individual market, by making it more attractive for healthier folks to buy insurance. Unfortunately, the other changes made to the market will probably make that situation worse than it is now. For what’s just as notable is what this bill doesn’t do: repeal most of the thicket of regulations that have helped drive up the cost of insurance. This bill leaves a huge swath of Obamacare untouched, which is why more than one conservative commentator has noted that it’s basically Obamacare Lite: “1/3 less income redistribution than regular Obamacare! Same great taste you love!”

None of this should be taken to mean this plan does nothing good. It does. Eliminating the explicit individual mandate is good but it only if done while allowing for insurance companies to discriminate against preexisting condition and not replacing it with a de-facto mandate. The plan would also defund planned parenthood (for a year), supports health savings accounts, and repeal the Obamacare taxes. This bill would also allow for selling insurance across state line and medical malpractice reform, but sadly, those would not be included in the reconciliation process bill which would allow passage with fifty-one votes. In all likelihood, those provisions will not be in the final version. These are all good steps but they do not change the reality.

Speaker Ryan, contrary to what you claim, this plan is not a full repeal. It is an attempt to do the politically safe option and trim the weeds around the problem. But is Obamacare-lite better than Obamacare? No. This plan is premised on the same premise as Obamacare, that government should be involved in healthcare. We all know how the left will frame this debate– the failure of the free market. The failure of this bill will only lead this debate to a greater dichotomy, the free market or single payer. Sadly, I know which wins.